Possible bid for RDI puts spotlight back on UK real estate stocks (and how cheap they might be)

Russ Mould
27 March 2019

“A possible offer for the real estate investment trust RDI from Australian property giant Cromwell again raises the offer of whether British commercial property firms are currently undervalued,” says Russ Mould, AJ Bell Investment Director. “Before the Australian approach, RDI was trading on a 40% discount to net asset value and on a dividend yield of 10%. Cromwell may think this represents a bargain, despite the risks posed by RDI’s retail exposure, modest GDP growth in the UK and what Brexit may (or may not) mean for sterling and the British economy.

“RDI’s response makes it clear there is no guarantee that a firm bid will appear by the 23 April deadline and its share price of 146p reflects this, as that represents a big discount to the reported 185p-a-share offer price. 

“That 22% gap may also reflect investor scepticism that a deal will be struck, following two failed bids for INTU, from Hammerson and a Peel Group-led consortium, and an abandoned approach for Hammerson by France’s Klepierre.

 

Premium / (discount) to historic NAV*

 

 

2019E dividend yield**

Safestore

46.3%

 

Newriver

10.0%

Big Yellow

40.6%

 

RDI

8.7%

SEGRO

19.3%

 

Hammerson

8.0%

Londonmetric Property

14.8%

 

INTU

6.8%

Harworth

(0.0%)

 

Hansteen

5.8%

TRITAX Big Box

 (2.2%)

 

Town Centre Securities

5.5%

Hansteen

(5.2%)

 

British Land

5.4%

Workspace

(8.4%)

 

LandSec

5.4%

Shaftesbury

(10.4%)

 

TRITAX Big Box

4.9%

A & J Mucklow

(10.8%)

 

A & J Mucklow

4.6%

Great Portland Estates

(11.2%)

 

Londonmetric Property

4.2%

CLS

(15.2%)

 

Workspace

3.9%

Derwent London

(15.8%)

 

Big Yellow

3.7%

St. Modwen

(15.9%)

 

Safestore

2.9%

Newriver

 (22.1%)

 

SEGRO

2.9%

Capital & Counties

(27.6%)

 

CLS

2.8%

RDI

(32.1%)

 

Derwent London

2.3%

LandSec

(34.5%)

 

Shaftesbury

2.0%

British Land

(37.2%)

 

St. Modwen

1.9%

Town Centre Securities

(39.3%)

 

Great Portland Estates

1.7%

Hammerson

(54.9%)

 

Harworth

0.7%

INTU

(66.5%)

 

Capital & Counties

0.6%

Source: Refinitiv data, *Company accounts for last published net asset value (NAV) per share figure, **Sharecast, consensus analysts’ forecasts for dividend per share payment

“It is interesting all the same that an overseas buyer is again testing the waters of the UK property market. 

“At 185p, RDI would be valued at a mere 14% discount to net asset value per share and on a dividend yield of around 7%. The 185p price tag would also be a 40%-plus premium to the pre-bid share price.

“All of these numbers make the big REITs like LandSec, British Land, Hammerson and INTU look very cheap indeed especially as it can be easily argued that they own higher-quality assets than RDI.

“Around a sixth of RDI’s assets are in Germany and its UK properties are mainly mixed use in London and across the regions. Around 33% of assets are offices and logistics and industrial sites, while 22% are hotels and a 30% in retail, where key assets include Priory Retail Park in Merton, Weston Favell in Northampton and Wigan’s Grand Arcade.

“In addition, RDI looks less attractive than say British Land, LandSec or Hammerson when looking at its loan-to-value ratio and average cost of debt, even if RDI’s balance sheet does not look stretched and the profile of both its debt maturity and property leases to first break compare pretty well.

 

Loan-to-value

Average debt cost

Vacancy  rate

Average debt maturity(years)

Average lease length (years)

British Land

27%

2.8%

2.2%

8.5

6.9

Hammerson

38%

2.7%

2.8%

5.4

n/a

INTU

53%

4.2%

3.3%

5.8

n/a

LandSec

26%

2.6%

1.9%

12.6

9.1

RDI

46%

3.4%

2.9%

6.7

7.0

Source: Company accounts

“Shareholders in the big REITs (and especially the retail-exposed one) will doubtless be hoping that the RDI approach leads to a firm bid that goes through, as it may make other investors, or even other predators, reassess the real estate sector once more, Brexit or no Brexit.”

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